Chapter 6 - Introduction to trading trusts

Use of trading trusts

The use of trading trusts as a commercial vehicle emerged during the 1970s, particularly in Australia, as an alternative to the use of a private company for the operation of a family business.201 The first major corporate trustee case reached the High Court of Australia in 1979.202 The subject began to receive academic attention from the early 1980s.203 Academic comment began to appear in New Zealand shortly afterwards.204 In its Preliminary Paper in 2002 the Law Commission considered that the use of trading trusts in New Zealand clearly seemed to be spreading.205 However, the Commission’s subsequent Report stated that submitters had responded that they had yet to encounter trading trusts or problems from their use. The Report stated “[t]his is understandable because use of trading trusts in New Zealand is not yet widespread, though it has begun.”206 With a few exceptions, trading trusts have received little judicial attention in New Zealand, especially at the appellate level; this may reflect “the relatively small value of many of these trusts, making protracted litigation uneconomical.”207

It is difficult to ascertain empirically the incidence of trading trusts at present in New Zealand, as the status of the company as a trustee is not required to be disclosed through the Companies Register. Accordingly, the Law Commission would be interested in views on whether trading trusts are in widespread use in New Zealand, and whether there are actual problems resulting from their use, including those identified in this Part.

 

Advantages of using a trading trust

The use of trusts in commerce has many advantages for those using them. Donovan Waters QC has said:208

It is well established that for trusts in the commercial area the elements of a trust that are most valued are asset segregation from the trustee’s own assets, the flexibility the settlor has with a trust in creating beneficial interests, and the prophylactic manner in which the courts have interpreted and applied the fiduciary obligations of the trustee. In addition to statutory limited liability, the corporation also offers the element of asset segregation and consequent protection from the creditors of others; incorporating a fund of assets will confer this protection for those assets. …

As a commercial vehicle, a trading trust in the particular form described above combines the advantages of a company, namely limited liability and separate corporate personality, with the advantages of a trust,209 for example, relative privacy and anonymity.210

Dal Pont describes four main advantages to using a trading trust:211

(a)avoiding the level of restrictive regulation and technical compliance requirements affecting companies,212 for example financial reporting obligations;

(b)the discretionary trust allows for a more tax-effective distribution of business income across a range of beneficiaries;

(c)the discretionary trust also offers flexibility in changing circumstances, particularly in selecting beneficiaries and the amount and timing of distributions;

(d)since trust property is excluded from assets that can be used to satisfy the claims of creditors of the corporate trustee, the trading trust may be a useful mechanism for asset protection in case of insolvency. Distribution of accumulated income and capital reduces the assets available to creditors.213

Corporate trustees carry certain advantages over natural persons. A key reason for having a corporate trustee is to protect individuals acting as directors from personal liability, because of the separate corporate personality of the company.214 In that respect a trading trust is a preferable structure to such alternatives as partnerships or sole traderships.215 Contracts with third parties are made in the name of the company, not in the names of the individual directors; it is the company not the directors who are liable. The same applies regarding liability for taxes, levies and statutory charges.216

Another advantage of a corporate trustee is succession: even if the directors change, the company remains the trustee. The trust’s assets can be held and where necessary registered in the name of the company, so no change to the title is needed in the event that the directors change.

 

In Levin v Ikiua, Heath J observed:217

Because the use of an assetless corporate trustee has the potential to defeat the interests of genuine creditors of a company, there is (rightly) a healthy degree of cynicism surrounding its use. However, it is as well to remember that a trading trust may be used for legitimate purposes, without its directors or shareholders having any intention to defeat the rights of creditors with whom it does business. In each case the intention of those who settle the trust and trade through this commercial vehicle will need to be considered.

Thus, as is explored more fully below, some of the same features that make a trading trust structure attractive in a commercial setting, particularly limited liability and a separate legal personality, can carry significant disadvantages for other parties that might deal with them.

Levin v Ikiua [2010] 1 NZLR 400 (HC) at [96].

Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 (HCA) [Octavo].

See HAJ Ford “Trading Trusts and Creditors’ Rights” (1981) 13 MULR 1; BH McPherson “The Insolvent Trading Trust” in PD Finn Essays in Equity (Law Book Company, Sydney, 1985) 142; HAJ Ford and IJ Hardingham “Trading Trusts: Rights and Liabilities of Beneficiaries” in PD Finn Equity and Commercial Relationships (Law Book Company, Sydney, 1987) 48.

See for example AW Lockhart “Trading Trusts: An Examination of Trustees’ Liability and Creditors’ Rights” (1985) 5 AULR 313. 

Law Commission Some Problems in the Law of Trusts (NZLC PP48, 2002) at 9.

Law Commission Some Problems in the Law of Trusts (NZLC R79, 2002) at 14.

Peter Moore “Trading Trusts: Law and Policy” (February 2008) at 1.

D Waters “The Trust in a Changed and Yet Changing World” [2008] JITCP 205 at 230–231.

Butler Equity and Trusts, above n 192, at 416.

Greg Kelly Law of Trusts (looseleaf ed, LexisNexis) at [2.12] [Law of Trusts]; Lockhart, above n 204, at 328.

Dal Pont, above n 190, at [27.15].  Endorsed in Levin v Ikiua [2010] 1 NZLR 400 (HC) at [102].

Moore, above n 207, at 2.

Law of Trusts, above n 210, at [2.12].

Butler Equity and Trusts, above n 192, at 417.

Moore, above n 207, at 2.

Pravir Tesiram “Contracting as a Trustee: Liability to Creditors and the Use of Private Trust Companies” (paper presented at New Zealand Law Society Trusts Conference, May 2005) at 168.

Levin v Ikiua [2010] 1 NZLR 400 (HC) at [101].